Latin America tightens its ties to the greenback

By
David R. Francis Staff writer of The Christian Science Monitor /
December 18, 2000

The United States dollar is rapidly becoming the currency of choice in Latin America.

In 10 years, predicts Steve Hanke, "virtually all" of the region will be "dollarized" - that is, using greenbacks as an official currency. An exception may be Brazil, says the Johns Hopkins University economist.

Already dollars are used by citizens throughout Latin America, even in remote areas.

Indeed, the US dollar is respected around the world. It inspires confidence because of its low inflation rate and the might of the US economy. It is what economists call a "vehicle currency," as the British pound was before World War II.

The dollarization of Latin America, however, is more advanced than in Russia. Panama has long used the dollar as its official currency. Ecuador switched in September, becoming the largest officially dollarized country in the world.

El Salvador last month made its currency, the colon, convertible to the dollar at a fixed exchange rate and freely usable in the nation. The national currency is expected to rapidly disappear. Argentina has for years pegged its peso to the dollar on a one-to-one basis and the dollar circulates freely.

Mexico's new president, Vicente Fox, has toyed with the idea of a monetary union for Mexico, Canada, and the US to enhance the North American Free Trade Area.

The common currency for this union could be an "amero," the North American equivalent of the euro in Europe, suggests Judy Shelton, an American economist who teaches at DUXX Graduate School of Business in Monterrey, Mexico.

Because it would be politically almost impossible for Washington politicians to abandon the dollar for an amero, it is more likely Mexico would make the dollar an official currency.

Mr. Fox doesn't advocate that publicly. It's too risky politically.

"Anybody can milk that for populist reasons," says Professor Shelton, who has had long conversations with Fox about Mexico's economic issues. "They would say Fox was lacking patriotism, ... an imperialist tool of the US."

Nonetheless, a former US ambassador to Mexico, Jim Jones, foresees a "de facto monetary union" of the US and its southern neighbor over 10 to 15 years.

The symbolism of the peso to Mexican sovereignty is "no longer an important issue," he says. A poll taken in Mexico showed that about 80 percent of Mexicans favor using the dollar as their currency, Mr. Jones told the Miami Conference on the Caribbean and Latin America earlier this month.

Hanke argues that economics will drive Mexico into dollarization. "The luxury of having their own currency is a luxury they can't afford," he says. "The peso is a half-baked currency."

A day after El Salvador adopted the dollar, for example, the interest rate on consumer loans and mortgages fell from 17 to 11 percent, reflecting the changed confidence level.

Such lower rates give a boost to economic growth. "People are not worried anymore about their currency and its exchange rate," says Hanke.

One negative factor for a country that dollarizes is the loss of seigniorage - the profit the government makes when it issues new coins, currency, and credit.

Hanke did a dollarization study for former Argentine President Carlos Menem early last year and found that the seigniorage loss would equal about 0.25 percentage points of gross domestic product. But this loss would be totally drowned in faster GDP growth of as much as 2 percent.

For instance, in the past few years many Latin American companies have delisted their stock at home and listed on US stock exchanges. By now, 42 percent of the total value of all Latin American stocks is listed in the US.

Many high-tech companies in Latin America have been seeking to raise money with initial public offerings of stock in the US where capital costs a lot less.

Florida Sen. Connie Mack (R) proposed legislation that would enable the US to share seigniorage with countries that dollarize.

But Treasury Secretary Lawrence Summers last summer opposed the plan as raising "a number of complex political, economic, foreign policy issues and US budget issues."

President-elect George W. Bush talks about expanding free trade to Latin America. If he succeeds, that would speed dollarization.